Tuesday, April 29, 2014

Probably the most under-reported story of the year is the faltering Chinese consumer. This really deserve a full post at some point but just remember that Chinese consumers are starting to see their first property value declines in the past decade and given the amount of leverage many of these consumers are dealing with the implications are huge for the world's second largest economy.

Sales growth rates for many luxury brands have dried up following China’s ongoing anti-corruption campaign, as gifting and lavish entertainment are scrutinized.

“It has been rough for luxury goods this year,” an unnamed department store manager told MSN Luxury. “The accumulating unsold stock caused by plummeting sales is a cause of concern for the brands too.” A recent article in Want China Times states that Hermès carried discounts of 20 to 50 percent."

Monday, April 28, 2014

I thought that every 3rd grade student with a modest curiosity for trivia knew these statistics, but apparently I was wrong based on the number of retweets this post received. Bill Gates -- who continues to wage an increasingly successful war against poverty and deadly diseases around the world -- posted this info graphic which shows the deaths attributable to various "animals" around the world.

Globally you are 100 times more likely to die by getting rabies from Fido than you are from sharks, lions, wolves and elephants combined!! Oh, and remember that bug spray when sitting by the pool this summer.*

* Note local mosquitoes are rarely deadly, these deaths are mainly due to malaria which is a sub-tropical issue.

I joked with someone the other day that every company I see seems to have embraced the "fake it, 'til you make it" mantra. In essence, this means just act like everything is going perfectly - you are selling out of every item you stock, your customers are demanding that you expand, investors are beating down your door, etc, even if none of it is true.

This is similar to what has happened in the equity markets for the past 6 mths. Companies continue to post adequate earnings, but increasingly they are falling short on the sales side. They tell us to ignore sales misses and focus on the earnings (cost controls and reduced investment allow earnings to grow faster than revenues). Fake it, 'til you make it.

However, there is one real gauge of the economy that is hard to fake - housing. Many people want to point to the resurgent US housing market as a sign of strength in the economy. However, I'll take a contrary view by offering this example of the sort of buying that has gone on in the past 4 years.

1) 50 houses are available for sale.
2) There are 20 buyers looking in this market.
3) 3 of the buyers are all-cash investors managing billions of liquid capital.
4) The large buyers quickly buy 35 of the homes drastically shrinking supply to 15 houses.
5) Now Realtors start moving prices up b/c the on the market supply has declined (even though total supply hasn't really changed).
6) The buyers start to panic and start overpaying.
7) The investors slowly leak out a few properties to keep demand and prices high.

This is the DeBeers (the diamond company) strategy for keeping prices inflated. The problem is that it is entirely dependent on the small buyer stepping up to buy. Lately, as interest rates have ticked up and the real economy has stagnated, real buyers have hesitated. The risk is that we could see one investor start to panic and dump massive amounts of inventory into the market. This would lead others to follow and soon housing could fall into a massive correction again.

The players are different from 2007 this time (Canada's housing bubble is much more like the US in 2007), but the set-up for a housing correction remains the same. Stay nimble, my friends.

* Russia took over Crimea
* US GDP has slipped back to around 1.5%
* Stocks fell 5% then a rumor of Japanese QE sparked a 5% rally
* People have found out the markets are rigged and apparently don't care (let me know if you need a primer on the whole High Frequency Trading issue. One of my old colleagues is the face of HFT).

Interestingly, despite all of the news markets are basically flat - Nasdaq's down 2%, the S&P500 is down 1% and the Dow is up 1%. There have been some very interesting swings in market sentiment but I continue to see worrying signals. Earnings this quarter have been mixed with a few bright spots. I think the earnings outlook remains cloudy and ultimately, I believe central bank policies and geopolitical news will be the primary drivers from here on out.

Russia/Ukraine update -
It's very telling watching the Sunday talk shows. Everyone was talking today about why the "SANCTIONS" are not having a greater impact, etc, etc. The problem that everyone seems to have a tough time grasping is that these sanctions imposed by the West were not on Russia, but on a small number of individuals and a bank. The "second stage" of sanctions to be announced this week to great fanfare are basically going to extend to another 15 or so people and maybe another holding company.

The US has pushed for stronger sanctions but behind closed doors the rumor is that both US and European companies are pedaling their influence to prevent major sanctions. Why do corporations care? Well, Russia is a sizable market for some industries, but the far greater issue is access to GAS. Europe gets about 30% of its gas from Russia and the risk of factories going idle or electricity rates going up is very worrisome for major corporations. I also think that 2 major deals inked by Russia in the past month (one with China and the other with India) indicate that our ability to influence this situation economically is limited.

I'm not advocating this position, but here is the Russian side of this story - the Ukraine is breaking up, there are many Russian speakers that wish to rejoin Russia, let them decide if they want to be part of the Ukraine or Russia via referendum. The Russian media is portraying this in similar terms to the reunification of East/West Germany. After the Berlin Wall fell there was a long process of votes and negotiations to bring the people of Germany together. The Russians believe much of East Ukraine should have the right to make the same decision after their elected government was toppled.

So, what happens next? I don't expect a major armed conflict, but the satellite imagery from Slavyansk is worrisome. It appears that about 15,000 troops from both sides are lined up. I do not believe Russia wants to have a war over this land, but I can't say the same for the Ukrainians. If you read foreign press on this matter you'll see time and again it appears as though the government is Kiev is trying to instigate something. I don't know what their rationale for provoking Russia would be (maybe speeding up NATO admittance??) but at every turn, the Ukrainians seem to be trying to escalate the situation.

In a totally unrelated story, did anyone see that 60 Minutes piece on our nuclear arsenal? How about those sweet 8" floppy disks that were running some of the command and controls? Sleep tight :)

Russian markets go up 1-2% after the new US "sanctions" aren't as bad as feared. The headlines read today that a mayor of a Ukrainian city was shot in an apparent assassination attempt. Without context it would make one think that this is some sort of Russian provocation, but it sounds like this mayor was pro-Russian, so perhaps Ukrainian forces may have been trying to instigate again?

The best line of the day so far via @dougkass "We have too few Apples and too many Amazons". That perfectly sums up my view of the current tech mania. Everything is consumer/consumption focused and very, very few businesses are focusing on the solving problems for people and corporations.

Fact of the day: 75% of iTunes app revenue is derived from video games.

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About Me

I grew up in La Fargeville before attending college in Manhattan and ultimately working on Wall Street for about 10 yrs. I left NYC/NJ in 2003 and relocated my family to the beautiful waterfront of Clayton, NY. I spend my days caring for my 2 daughters and dabbling in the markets.